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Published 26 June 2012 05:04, Updated 27 June 2012 07:00
George Soros says a failure by European leaders to find a solution to the region’s debt crisis over the next three days could prove “fatal”. Photo: AFP
Billionaire investor George Soros has said the failure of European leaders to find a resolution for the region’s long-running debt crisis when they meet this week could be fatal to the euro.
Soros, who is promoting the idea of a European “debt redemption fund”, also said that Germany is justified in resisting a push for common euro bonds, saying political unity is needed in Europe before such a measure can be effectively implemented.
Speaking to Bloomberg television ahead of the euro summit on Wednesday, Thursday and Friday, Soros said that Europe’s leaders are making progress in addressing problems within its banking system, but that they are failing to properly address the sovereign debt crisis.
“Basically, there’s an inter-related problem of the banking system and the excessive risk premium on sovereign debt. They’re siamese twins. They’re tied together and you have to tackle both. And it’s recognised that you have to do that and there’s now widespread agreement on what to do on the banking side – there’s the beginning of a banking union,” Soros said.
“There’s a disagreement on the fiscal side and unless that is resolved in the next three days then I’m afraid the summit could turn out to be a fiasco and that could be actually fatal because you are facing the possibility of Greece leaving the euro and perhaps the European Union. And you need to strengthen the remaining euro structure to withstand that shock.”
Asked if there was a heightened risk of contagion for Italy and Spain if euro leaders did not fire off a “bazooka response” to the crisis, Soros said “that is right”.
“There is then a serious threat of the euro breaking down and that’s not to be neglected because it’s now quite serious,” he added.
Soros’ comments to Bloomberg echo widely publicised statements from the billionaire investor in early June that Europe had a three-month window after the June 17 Greek election to resolve its crisis.
On Monday, Soros painted a bleak picture of the future of Europe should its leaders fail to find a solution to the region’s economic woes, saying what would be left would be a “German empire” with the lynchpin economy the only strong fiscal power amid a number of “permanently depressed” areas.
”Even if you manage to avoid, let’s say, an accident similar to what you had in 2008 with the bankruptcy of Lehman Brothers ... the euro system that would emerge would actually perpetuate the divergence between creditors and debtors and it would create a Europe that is very, very different from the Europe as an open society that fired people’s imagination and led to the creation of the European Union.”
Soros went on in the interview to pitch his own idea for easing the debt crisis – a debt reduction fund that would allow embattled countries such as Spain and Italy to finance debt at a lower cost.
“What you need is a European fiscal authority ... in charge of the various rescue mechanisms ... and it would be empowered to issue Treasury bills, to set up a debt reduction fund and actually buy up the excess stock of that which has accumulated in the hands of particularly Spain and Italy,” he explained.
“Those Treasury bills would yield 1 per cent or less and that would be the relief that those countries need in order to finance their debt. They currently have to pay risk premiums of 5 or 6 per cent.”
Soros’ comments came as German Chancellor Angela Merkel again rejected calls for joint euro-bloc bonds and as investors sought refuge in US Treasuries amid expectations that this week’s three-day euro summit will fail.
“The market is stepping back from any meaningful expectation for anything from the summit,” CRT Capital Group government bond strategist Ian Lyngen told BusinessWeek. “We are back in a risk-off mode until there is a reason not to be.”